Dollar General Corporation — Form 10-Q Summary
Period: The filing covers the 13 and 26 weeks ended August 2, 2013, compared with the periods ended August 3, 2012. This is fiscal 2013 second quarter and first half, despite the request metadata identifying 2012 Q2. Dollar General operated 10,866 stores in 40 states. The interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial results and position
| Metric | 13 weeks ended Aug. 2, 2013 | 26 weeks ended Aug. 2, 2013 |
|---|---|---|
| Net sales | $4.395 billion; up 11.3% | $8.628 billion; up 9.9% |
| Same-store sales growth | 5.1% | 3.8% |
| Gross profit / margin | $1.377 billion / 31.34% | $2.672 billion / 30.97% |
| Operating profit / margin | $412.8 million / 9.39% | $807.8 million / 9.36% |
| Net income | $245.5 million | $465.6 million |
| Diluted EPS | $0.75 | $1.42 |
| Interest expense | $20.6 million | $45.1 million |
For the first half, operating cash flow was $484.1 million, versus $373.5 million a year earlier; capital expenditures were $308.3 million. Cash increased to $169.2 million from $140.8 million at fiscal year-end. Inventories were $2.534 billion, up from $2.397 billion at February 1, 2013.
Total debt obligations were approximately $2.871 billion, including $25.9 million current and $2.845 billion long-term. The company had $753.8 million of availability on its revolving facility, after $44.2 million of letters of credit. It reported compliance with debt covenants and said available cash, operating cash flow and credit availability should fund obligations, working capital and capital spending for the next 12 months and several years.
Changes versus comparable periods
- Second-quarter sales rose 11.3%, supported by 5.1% same-store growth from increased traffic and average transaction amount. Consumables, including tobacco, perishables, candy and snacks, were key contributors.
- Despite higher sales, gross margin fell 65 basis points in the quarter and 77 basis points year to date. Management attributed the decline mainly to a higher consumables mix, lower-margin consumables and increased inventory shrink.
- SG&A declined as a share of sales by 23 basis points in the quarter and 30 basis points year to date, reflecting labor-management efficiencies and lower incentive compensation, partly offset by higher costs including litigation, repairs, debit-card fees and depreciation.
- Quarterly net income increased 14.6% and diluted EPS rose from $0.64 to $0.75. Lower interest expense helped: it fell $15.0 million in the quarter and $27.6 million year to date, primarily following refinancing. Year-to-date results included an $18.9 million pretax debt-retirement loss.
- Year-to-date effective tax rate was 37.4%, versus 36.2%; the prior-year period benefited more from resolution of tax examinations. Federal hiring credits partly offset the increase, but availability after December 31, 2013 depended on uncertain legislative extension.
Outlook, management commentary and risks
- Management said it remained optimistic about meeting its 2013 business goals, while noting continued economic pressure on customers and challenging discretionary sales. Priorities include productive sales growth, gross-margin improvement, cost efficiencies and customer service.
- 2013 capital expenditures were projected at $575 million to $625 million. Plans included approximately 650 new stores and 550 remodels or relocations; first-half activity was 375 openings and 377 remodels or relocations. A Pennsylvania distribution center was under construction.
- Management anticipated pressure on gross margin from sales mix and shrink. Inventory was up 11% per store year over year, and management cited inventory availability and turnover as ongoing priorities; rolling four-quarter inventory turnover was 4.9 times.
- The company refinanced in April 2013, replacing secured facilities with a five-year $1.0 billion term loan and $850 million revolving facility, and issuing $1.3 billion of notes due 2018 and 2023. Senior unsecured ratings were upgraded by Moody’s and S&P in 2013, both with stable outlooks; future rating changes could affect financing costs and access.
- Legal matters include an $8.5 million preliminary settlement of the Richter store-manager case, subject to court approval, recorded as a second-quarter expense. Other employment, background-check and wage-and-hour cases remain unresolved; the company could not estimate potential losses in several matters and warned adverse outcomes could be material.
- Other risks identified include consumer demand and economic conditions, shrink, sourcing and supply-chain disruptions, labor and operating costs, debt and covenant restrictions, interest rates, litigation, tax-law changes, credit-rating changes and execution of store-growth plans. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm the reporting-period mismatch: this filing is for fiscal 2013 Q2, not 2012 Q2.
- Track whether sales growth can be sustained while gross margin recovers from the lower-margin consumables mix and higher shrink.
- Review execution of the 2013 capital plan, store openings and remodels, distribution-center construction, and inventory growth and turnover.
- Monitor debt, refinancing terms, revolver use, covenant compliance and the effect of interest rates or credit-rating changes.
- Follow court approval and payment of the Richter settlement and developments in other litigation and tax contingencies.
- Assess the timing and funding of planned share repurchases: $220.0 million was spent in the first half, with $423.6 million remaining under the authorization at August 2, 2013.